Manor Care plans spinoff Company to divide into building and operational firms

Allows rapid expansion

Profitability can continue as new units open

Assisted living

September 16, 1997|By M. William Salganik | M. William Salganik,SUN STAFF

As it gears up to develop 200 assisted living complexes in the next five years, Manor Care Inc. of Gaithersburg announced yesterday that it will split itself into two companies -- one to build facilities and another to operate them.

The move allows Manor Care to expand rapidly in the growing assisted living market -- it opened only half a dozen such facilities in the past fiscal year and expects 15 to 20 this year -- without damaging its track record for profitability.

The problem with rapid development of new facilities is that there are "significant start-up losses, and that hits the bottom line," said Stewart Bainum Jr., chairman of Manor Care, who will be chairman of both new companies.

"Today, when we open a facility, we probably book a $400,000 to $500,000 loss the first year," since it takes time for the building to fill, said Donald C. Tomasso, who will be president and chief executive officer of ManorCare Health Services Inc., the operating company.

The spinoff allows the operating company to "go off balance sheet" with start-up losses, stepping up the opening of new buildings "without smacking the short-term earnings," said Joel M. Ray, an analyst with Wheat First Butcher Singer in Richmond, Va.

"Manor Care has a reputation for solid earnings growth, and that could be damaged by opening 40 to 50 properties a year," Ray said.

The building company -- to be called Manor Care Realty Inc. -- will carry the loss, then recover the money by selling the full and profitable facility to the operating company.

Ray said this strategy was being followed by other developers of assisted living facilities, notably by CareMatrix Corp. of Needham, Mass.

The stock market reacted positively. Shares of Manor Care gained 10 percent in value, jumping by $3.125 to $34.25. Volume was 462,100, more than five times the three-month daily average of 80,700.

Bainum said the split would make sense for Manor Care because "capital markets value pure-play enterprises more highly."

Owners of Manor Care stock will receive one share in each of the new companies for each share they own. The spinoff, already approved by Manor Care's directors, still needs regulatory approval and an Internal Revenue Service ruling that the transaction would be tax-free to the company and its stockholders.

The spinoff should have no effect on residents at Manor Care facilities, Tomasso said. "The same team of people will be operating the same facilities as today, so from the customer's point of view, it should be transparent," he said.

Joseph R. Buckley will be president and CEO of Manor Care Realty. Like Tomasso, Buckley is currently an executive vice president of Manor Care Inc.

ManorCare Health Services will own the assisted living facilities once they are profitable. It will lease Manor Care's nursing homes, which will be owned by Manor Care Realty. The health company will also assume Manor Care's controlling interests in an institutional pharmacy company and a home health operation.

Assisted living facilities provide some help to elderly, but less care than a nursing home.

That amount of growth would double the number of Manor Care facilities.

It now operates 27,809 beds in 29 states.

Spinoffs are nothing new to Manor Care, which last year split off its lodging division, now called Choice Hotels International Inc.

Pub Date: 9/16/97

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